Mapping an over the counter trade into a clearing house

ABSTRACT

A method and system converts OTC positions into contracts clearable at a futures clearing house. Each OTC position has a maturity date. The method comprises: a) defining a plurality of tenors. The plurality of tenors is fewer in number than the OTC maturity dates of the OTC positions. The method also comprises: b) defining a contract, which is clearable at the clearing house, corresponding to each tenor defined in step a); c) mapping each OTC position, as it is executed, into one or more of the contracts, based on the maturity date of the OTC position; and d) between business days, re-mapping each contract mapped at step c) to account for the move of calendar day. The invention finds particular application as a method and system to convert OTC Foreign Exchange (FX) positions into futures contracts clearable at a futures clearing house. The OTC FX positions may include OTC FX spot positions and OTC FX forwards positions.

CROSS-REFERENCE TO RELATED APPLICATION

This application is Continuation of U.S. patent application Ser. No.14/840,851 filed Aug. 31, 2016 which is a divisional application of U.S.Pat. No. 14/079,718, filed Nov. 14, 2013, which is a divisional of U.S.patent application Ser. No. 13/669,250, filed Nov. 5, 2012, which is adivisional of U.S. patent application Ser. No. 12/774,053, filed May 5,2010, which claims benefit under 35 U.S.C. §119(e) to U.S. ProvisionalApplication No. 61/175,869, filed May 6, 2009, the entire contents ofeach of which are hereby incorporated by reference.

FIELD OF THE INVENTION

This invention relates to a method and system for conversion of Over theCounter (OTC) positions into contracts clearable at a clearing house. Inparticular, this invention relates to a method and system for conversionof OTC Foreign Exchange (FX) positions into futures contracts clearableat a futures clearing house.

BACKGROUND OF THE INVENTION

OTC markets allow one party to buy and sell items directly with acounterparty, without a central exchange. A central party may facilitatemarket making on an OTC platform but is not involved in any executedtrade. An OTC contract is a bilateral contract in which the two partiesagree on how a particular trade or agreement is to be settled in thefuture. The FX market is one example of an OTC market. Spot, forwardsand swaps are examples of OTC contracts.

On the other hand, exchange-traded contracts are standardized by theexchanges where they trade and the clearing houses at which they settle.A clearing house is a financial services company that provides clearingand settlement services for financial transactions on an exchange. Thecontract sets out the asset that is to be bought or sold, and how, when,where and in what quantity it is to be delivered. One example of astandardized contract traded on an exchange and cleared at a clearinghouse is a futures contract. A futures contract is a contract to buy orsell a standardized quantity of a specified commodity of standardizedquality at a certain date in the future. The future date is called thedelivery date. The commodity is, in many cases, a non-traditionalcommodity, such as FX or other financial instruments. For financialinstruments, the delivery date is often referred to as the maturity dateor value date. The time to the delivery date or maturity date is knownas the tenor of the contract.

There are a number of differences between an OTC market and anexchange-based market. OTC markets require that the counterpartiesaccept each other's creditworthiness, whereas exchange based markets aregenerally centrally cleared and settled via an associated clearinghouse; the clearing firm acts as a counterparty and hence reduces creditrisk for the counterparties. OTC markets allow non-standard contracts tobe traded, assuming a selling counterparty can find a buyingcounterparty, and vice-versa, whereas an exchange allows only certainstandardized contracts to be traded. Depending on market conditions, atany given time, there may be more liquidity in either the OTC market orthe exchange-based market.

Because contracts-based clearing houses, such as clearing housesassociated with futures exchanges, are already well established, andprovide a number of advantages, it has previously been appreciated thatintegrating OTC-traded contracts into a contracts-based clearing regimemay be desirable. Such integration may allow a trader to benefit fromthe execution advantages of the OTC market and the clearing and settlingadvantages of an exchange.

One example from the prior art, of such integration of an OTC productinto a contracts-based clearing house is in the field of submitting OTCproducts into a futures clearing house for settlement. Traditionally,this has been done either by defining a futures contract for everybusiness day that the OTC contract may be settled, or by restricting OTCsubmission to contract dates supported by the clearing house.

FX spot comprises buying one currency and selling a different currencyfor immediate, rather than future, delivery. The standard settlementtimeframe for FX spot trades is S=T+2 business days, where S is the spotdate and T is the date of trade execution, although settlementtimeframes of T, and T+1 are also possible. An FX transaction which hasa settlement date after the spot date is called an FX forwards contract.

In the case of integrating FX OTC positions into a futures clearingregime, to include FX spot and FX forwards, this will mean defining anew futures contract for every currency-pair and business day over thenext 3 to 5 years. This obviously requires a great deal of processingand storage, as well as daily maintenance to keep pace with the changeof calendar dates.

There is therefore a need to provide an improved method and system forintegrating OTC trades into a contracts-based clearing house.

SUMMARY OF THE INVENTION

According to one aspect of the invention, there is provided a method forconversion of OTC positions into contracts, each OTC position having amaturity date, each contract being clearable at a clearing house, themethod comprising the steps of: a) defining a plurality of tenors, theplurality of tenors being fewer than the OTC maturity dates of the OTCpositions; b) defining a contract, clearable at the clearing house,corresponding to each tenor defined in step a); c) mapping each OTCposition, as it is executed, into one or more of the contracts, based onthe maturity date of the OTC position; and d) between business days,re-mapping each contract mapped at step c) to account for the move ofcalendar day.

According to another aspect of the invention, there is provided asystem, for connecting to a clearing house and to one or more OTCplatforms, for conversion of OTC positions from the one or more OTCplatforms, into contracts clearable at the clearing house, each OTCposition having a maturity date, the system comprising: means fordefining a plurality of tenors, the plurality of tenors being fewer thanthe OTC maturity dates of the OTC positions; means for defining acontract, clearable at the clearing house, corresponding to each definedtenor; means for mapping each OTC position, as it is executed on one ofthe OTC platforms, into one or more of the contracts, based on thematurity date of the OTC position; and means for re-mapping, betweenbusiness days, each mapped contract, to account for the move of calendarday.

According to another aspect of the invention, there is provided a methodin a computerized system for conversion of OTC positions from one ormore OTC platforms, into contracts clearable at a computerized clearinghouse, each OTC position having a maturity date, the method comprisingthe steps of: defining, in a first computer processor, a plurality oftenors, the number of tenors being less than the number of OTC maturitydates of the OTC positions; defining, in a second computer processor, acontract clearable at the clearing house, corresponding to each definedtenor; mapping each OTC position, as it is executed on one of the OTCplatforms, into one or more clearable contract positions, based on thematurity date of the OTC position; between business days, generating acontract position opposite to the mapped contract position, therebycancelling out the mapped contract position, and generating a furtherclearable contract position based on the maturity date of the OTCposition being one business day closer.

According to another aspect of the invention, there is provided a methodin a computerized system for conversion of OTC FX positions from one ormore OTC platforms, into standardized futures contracts processable at atraditional futures clearing house, each OTC FX position having a valuedate, the method comprising the steps of: defining, in a first computerprocessor, a plurality of tenors, the number of tenors being less thanthe number of OTC value dates of the OTC FX positions; defining, in asecond computer processor, a standardized futures contract processableat the clearing house, corresponding to each defined tenor; mapping eachOTC FX position, as it is executed on one of the OTC platforms, into oneor more processable standardized futures contract positions, based onthe value date of the OTC FX position; forwarding the mappedstandardized futures contract positions to the clearing house; on changeof business days, generating a futures contract position opposite to themapped futures contract position, thereby closing out the mapped futurescontract position, and generating a new processable standardized futurescontract position based on the value date of the OTC position being onebusiness day closer; and forwarding the generated new standardizedfutures contract positions to the clearing house.

According to another aspect of the invention, there is provided acomputerized system, for cooperation with a computerized clearingplatform and with one or more computerized OTC platforms, for conversionof OTC positions from the one or more computerized OTC platforms, intocontracts clearable on the computerized clearing platform, each OTCposition having a maturity date, the system comprising: a first computerprocessor for defining a plurality of tenors, the plurality of tenorsbeing fewer than the OTC maturity dates of the OTC positions; a secondcomputer processor for defining a contract, clearable on thecomputerized clearing platform, corresponding to each defined tenor; acomputerized mechanism for mapping each OTC position, as it is executedon one of the computerized OTC platforms, into one or more of thecontracts, based on the maturity date of the OTC position; and acomputerized mechanism for re-mapping, between business days, eachmapped contract, to account for the move of calendar day.

According to another aspect of the invention, there is provided acomputerized system, for connecting to a computerized futures clearinghouse and to one or more computerized OTC platforms, for conversion ofOTC FX positions from the one or more computerized OTC platforms, intofutures contracts clearable at the computerized futures clearing house,each OTC FX position having a value date, the system comprising: a firstcomputer processor for defining a plurality of tenors, the plurality oftenors being fewer than the OTC value dates of the OTC FX positions; asecond computer processor for defining a standard futures contract,clearable at the computerized futures clearing house, corresponding toeach defined tenor; a computerized mechanism for mapping each OTC FXposition, as it is executed on one of the computerized OTC platforms,into one or more of the standard futures contracts, based on the valuedate of the OTC FX position; and a computerized mechanism forre-mapping, between business days, each mapped standard futurescontract, to account for the move of calendar day.

According to another aspect of the invention, there is provided a methodin a computerized clearing system for conversion of OTC FX spotpositions from one or more OTC platforms, into standard futurescontracts clearable at a computerized futures clearing house, each OTCFX spot position having a value date of the current business day, theday after the current business day or two days after the currentbusiness day, the method comprising the steps of: defining, in acomputer processor, three tenors and three corresponding standardfutures contracts clearable at the clearing house; mapping each OTC FXspot position having a value date of the current business day, as it isexecuted, to the first contract; mapping each OTC FX spot positionhaving a value date of the day after the current business day, as it isexecuted, to the second contract; mapping each OTC FX spot positionhaving a value date of two days after the current business day, as it isexecuted, to the third contract; at the end of the current business day,re-mapping each OTC FX spot position having a value date of the dayafter the current business day, which is a new business day, to thefirst contract; and at the end of the current business day, re-mappingeach OTC FX spot position having a value date of two days after thecurrent business day, which is one day after the new business day, tothe second contract.

According to another aspect of the invention, there is provided a methodin a computerized clearing system for conversion of OTC FX forwardspositions from one or more OTC platforms, into standard futurescontracts clearable at a computerized futures clearing house, each OTCFX forwards position having a future value date, the method comprisingthe steps of: a) defining, in a computer processor, x tenors and xcorresponding standard futures contracts clearable at the clearinghouse, wherein x is a predefined number determined from the number andspread of value dates of the OTC FX forwards positions; b) weightingeach OTC FX forwards position between two of the x contracts, based onthe point in time of the OTC FX forwards position's future value daterelative to the point in time, with respect to the current business day,of the tenor corresponding to the first of the two of the x contractsand the point in time, with respect to the current business day, of thetenor corresponding to the second of the two of the x contracts; c)mapping a first portion of the OTC FX forwards position into the firstcontract, based on the weighting of the first contract; d) mapping asecond portion of the FX forwards position into the second contract,based on the weighting of the second contract, wherein the sum of thefirst and second portions equals the whole FX forwards position; and e)at the end of the current business day, before a new business day,repeating steps b), c) and d) for the new business day.

Embodiments of the invention have the advantage of reducing the numberof contracts, clearable at the clearing house, that need to be defined.

Embodiments of the invention have the advantage of reducing the amountof management of contracts required.

Embodiments of the invention have the advantage that there is no effecton mark-to-market position.

Embodiments of the invention have the advantage that a marketparticipant's outstanding notional position is not affected.

Embodiments of the invention have the advantage that an existingcontracts-based clearing house can be used for integration with OTCtrades.

BRIEF DESCRIPTION OF DRAWINGS

Embodiments of the invention will now be described, by way of exampleonly and with reference to accompanying FIG. 1, which is a schematicview of an embodiment of the system of the invention.

DESCRIPTION OF PREFERRED EMBODIMENTS

The system embodying the invention is arranged to convert OTC productsinto standardized contracts, which are clearable at a contracts-basedclearing house. The OTC product may be any suitable product whichdefines a number of maturity dates, which may include the currentbusiness date and a number of future dates. The contracts-based clearinghouse may be any suitable clearing house in which a number ofstandardized contracts are defined and clearable between counterparties.

In the following examples, the OTC product is OTC FX, in the form of OTCFX spot and OTC FX forwards, and the contracts-based clearing house is afutures clearing house for clearing futures contracts. However, anysuitable OTC product and contracts-based clearing house may be used withthe system and method of the invention.

FIG. 1 shows an embodiment of the system of the invention. As shown, thesystem 101 is in communication with clearing house 103 and with aplurality of OTC systems, shown generally at 105. The system 101comprises first processor 107, second processor 109, mapping mechanism111 and cost-of-carry calculator 113, whose functions will be furtherdescribed below.

In this embodiment, clearing house 103 is a futures clearing house forclearing standardized futures contracts. Each of those futures contractshas a defined maturity date, which is one of a plurality of possiblematurity dates specified by the clearing house. In this embodiment, theOTC information input into the system 101 is provided by a number ofdifferent OTC systems, individuals who may act as brokers, or any otherplatform which can provide information about OTC trades. In thisembodiment, the OTC trades are OTC FX trades, both FX spot and FXforwards. Other FX trades, such as FX swaps, FX options, are alsopossible.

Processor 107 is arranged to define a plurality of tenors, that is,time-to-maturity dates. The number of tenors defined will depend on anumber of factors, including the number and spread of maturity dates ofthe actual OTC FX trades, and this is discussed further below. Thematurity date may be expressed as T+t, where T is the trade executiondate and t is the tenor.

FX spot comprises buying one currency for another currency forimmediate, rather than future, delivery. The standard settlementtimeframe for FX spot trades, that is, the maturity date, is S=T+2business days, where S is the spot date. A notable exception is theUSD-CAD currency pair, which settles at T+1 business day. Thus, for thepurposes of FX spot, it is preferable to define three tenors: T, T+1business day, T+2 business days. Any tenor is relative to the currentspot date (that is S=T+2 business days), but when taken in the contextof FX, the maturity date must always fall on a valid clearing day forboth currencies involved. For example, if the current business date isThursday 16 Oct. 2008, the standard settlement time for FX spot tradesexecuted today will be Monday 20 Oct. 2008, since 18 Oct. 2008 falls ona Saturday and the next available business date is Monday. Similarly, atrade executed on Friday 17 Oct. 2008 will have a standard settlementdate of Tuesday 21 Oct. 2008.

FX forwards comprises buying one currency for another currency forfuture delivery. Any future maturity date i.e. any date after the spotdate, may be defined, according to the requirements of the two partiesinvolved in the trade. Typically however, the maturity dates for FXforwards are within the next 3 to 5 years. For example, 3 months (S+3months) is a valid tenor. Again, any tenor is relative to the currentspot date, but when taken in the context of FX, the maturity date mustalways fall on a valid clearing day for both currencies involved. Forexample, if today is Wednesday 22 Oct. 2008, the spot date (that is T+2days) is Friday 24 Oct. 2008. Thus, the 3-month tenor for GBP-USD isMonday 26 Jan. 2009, since 24 Jan. 2009 falls on a Saturday and the3-month tenor adjusts to the next business day. For the purposes of FXforwards, any number of tenors may be defined, generally falling withinthe next 3 to 5 years or thereabouts. The number of tenors defined willbe discussed below.

Processor 109 is arranged to define a standardized contract for eachtenor defined in processor 107. The particular contract defined for eachtenor is not important—it is only important that there is a one-to-onecorrelation between tenor in 107 and contract in 109, and that thestandardized contracts defined are clearable at clearing house 103.Thus, in this case, the standardized contracts are futures contractshaving a maturity date that is standard to futures clearing house 103.It is preferable that there is some sort of logical correlation betweeneach tenor and its corresponding futures contract, although this is notnecessary.

In the case of a futures clearing house, it is preferable that thestandardized futures contracts defined have maturity dates that are along way in the future. This is so that there is no chance that thefutures contracts will expire imminently. Nor will they require constantmaintenance. Because of this, the futures contracts may be referred toas “perpetual futures contracts”, since the expiry date is so far awaythat the futures contract is effectively everlasting i.e. perpetual. Anexpiry year of, for example, 2099 may be suitable. Because the actualmaturity dates need to be acceptable to the clearing house and relatedclearing systems, these will typically be defined using the standardmaturity months of March, June,

September and December (or other standard maturity dates as defined bythe clearing house). For example December 2099 would be a suitablematurity date.

Mapping mechanism 111 is arranged to convert the actual open positionsof the OTC products traded at 105, into positions in the standardizedfutures contracts defined by processor 109 and clearable at clearinghouse 103. Mapping mechanism 111 has two functions: 1) to map, inreal-time, each incoming open position, as trades are being executed at105, and 2) to perform a re-map at the end of each business day toaccount for the move forward one calendar day. Mapping mechanism 111works in conjunction with calculator 113. Calculator 113 providesinformation for the mapping mechanism regarding cost-of-carry which isrequired when mapping mechanism rolls over FX spot positions to the nextbusiness day. Cost-of-carry can be thought of as the cost to a party formaintaining a given position over time. This will be discussed furtherbelow.

Mapping mechanism 111 stores a record of each tenor and the futurescontract to which it is mapped. At the end of each business day, thematurity date of the underlying FX position is one day closer, so themapping to the futures contracts must be redefined. Note, however, thatthe maturity date of the corresponding futures contract is fixed i.e. itis always defined with respect to the current business day. The mappingfor FX spot and FX forwards will now be described.

Mapping for FX Spot

For FX spot, three tenors are defined in processor 107: T, T+1 businessday, T+2 business days, that is, settlement on the current business day,settlement in one business day, and settlement in two business days. So,three standardized futures contracts are defined in processor 109. Inone example, the three standardized futures contracts are June 2099(Jun099), corresponding to the current business day, T, September 2099(Sep099), corresponding to T+1 business day, and December 2099 (Dec099),corresponding to T+2 business days (which is equal to the spot date, S).Any suitable futures contracts may be defined in processor 109, as longas they are clearable at clearing house 103 and are preferablyperpetual.

Mapping mechanism 111 then maps each OTC FX spot trade, in real-time asit is executed, into the corresponding futures contract. For FX spot,this is a relatively straightforward one-to-one map. Thus, FX trades forsettlement on the current business day (also known as cash settlement)are mapped to Jun099 contracts in clearing house 103, FX trades forsettlement in one business day (such as a USD-CAD FX spot trade) aremapped to Sep099 contracts in clearing house 103, and FX trades forsettlement in two business days (such as a GBP-USD FX spot trade) aremapped to Dec099 contracts in clearing house 103.

Mapping mechanism 111 also re-maps each outstanding FX spot position atthe end of each business day. Trades resulting in positions having atenor T have already been settled with resulting profit or loss paid orreceived so all positions and money balances are zero (not outstanding).Trades having a tenor T+1 business day must now be settled on thecurrent business day (since we have moved forward one calendar day) sonow map to Jun099, with account taken of the cost-of-carry, ascalculated at 113, for the change of business day. Trades having a tenorT+2 business days must now be settled in one business day (since we havemoved forward one calendar day) so now map to Sep099, with account takenof the cost-of-carry, as calculated at 113, for the change of businessday.

Mapping mechanism 111 performs this re-map by generating new positionsat clearing house 103. Firstly, the mapping mechanism generates a newposition to offset each outstanding position. For each outstandingposition, a position equal to the reverse net position of thecorresponding futures contract is generated. The reverse position isexactly the same as the original mapped position (except for thedirection), so that the outstanding position is completely neutralized.Secondly, the mapping mechanism generates new positions corresponding tothe original outstanding positions, but for the next business day. Thenew positions incorporate a new spot basis and the cost-of-carry, fromcalculator 113, for the elapsed time between the original date and thenext business day. This accounts for the move forward one calendar day.For each original position, a new position is generated.

In the case of FX spot, this is equivalent to the mapping mechanismsimply generating a swap between one value date and the next. Thismaintains the net position. Overall, the mapping mechanism produces anaverage of buys swaps and an average of sells swaps between thecontracts corresponding to the two value dates. The average of buys andsells are processed separately to allow for cases where marketparticipants may have locked in profit or loss on a position, closingout the position in the OTC market, but still requiring management atthe clearing house to coordinate cash settlement on the appropriatecontract day as determined by the delivery date of the OTC contract.

Of course, on the next business day, new trades are also being receivedfrom 105 so that any new FX trade having tenor T, also maps to Jun099.In addition, any new settlement tomorrow, T+1, trades also map toSep099. New T+2 trades map to Dec099.

Note that, during the mapping and re-mapping, the maturity date of theunderlying FX position is fixed.

Mapping for FX Forwards

For FX forwards, any suitable number x of tenors is defined in processor107. And, a corresponding number of standardized futures contracts isdefined in processor 109.

For FX forwards, or any other longer dated activity, the mapping inmapping mechanism 111 is not a simple one-to-one mapping. Each OTC FXforwards trade is weighted into a portion of a first, near tenor and aportion of a second, far tenor, the relative portions depending on theposition in time of the OTC FX forwards maturity date compared with thepositions in time of the near and far tenors. For a linear system:

$\begin{matrix}{{FuturesContract}_{NearTenor} = {1 - \frac{t_{FXforward} - t_{NearTenor}}{t_{FarTenor} - t_{NearTenor}}}} & (1) \\{{FuturesContract}_{FarTenor} = {1 - \frac{t_{FarTenor} - t_{FXforward}}{t_{FarTenor} - t_{NearTenor}}}} & (2)\end{matrix}$

where:FuturesContract_(NearTenor) is the percentage weighting into the futurescontract corresponding to the near tenor,FuturesContract_(FarTenor) is the percentage weighting into the futurescontract corresponding to the far tenor,t_(FarTenor) is the time to the far tenor maturity date (normallydefined in days),t_(NearTenor) is the time to the near tenor maturity date (again,normally defined in days), andt_(FXForward) is the time to the OTC FX forward trade maturity date(again, normally defined in days).

As with FX spot, the maturity date of the underlying FX position(T+t_(FxForward)) is fixed (T has a particular date), but the mapping tothe corresponding futures contract(s) (T+t_(FarTenor) andT+t_(NearTenor)) float i.e. they are always defined with respect to thecurrent business day (T always equals today).

FuturesContract_(FarTenor)+FuturesContract_(NearTenor)=1=100% (3)

since each OTC FX forwards trade is completely weighted between the twotenors and hence between the two futures contracts.

Thus, if the OTC FX forwards trade has a maturity date of T+135 dayswhere T is the current business day, and the near tenor is T+90 days,and the far tenor is T+180 days, from Equation (1):

$\begin{matrix}{{FuturesContract}_{NearTenor} = {{1 - \frac{135 - 90}{180 - 90}} = {0.5 = {50\%}}}} & \;\end{matrix}$

and from Equation (2):

${FuturesContract}_{FarTenor} = {{1 - \frac{180 - 135}{180 - 90}} = {0.5 = {50\%}}}$

Because the FX forward has been split into two fixed futures contracts,there is now no need to define and manage a contract on the 145^(th)day, 144^(th) day, 143^(rd) day etc of life of the FX forward contract.

So, mapping mechanism 111 maps each OTC FX forwards trade, as it isexecuted, into the corresponding futures contract(s). If the maturitydate of the OTC FX forwards position falls between two of the tenorsdefined in processor 107, the trade will map to two correspondingfutures contracts in accordance with Equations (1) and (2). If thematurity date of the OTC FX forwards trade falls exactly on one of thetenors defined in processor 107, the trade will map to one correspondingfutures contract. This is because one of Equations (1) and (2) will beequal to 0, the other equal to 1.

Mapping mechanism 111 also re-maps each outstanding FX forwards positionat the end of each business day. This accounts for the move forward onecalendar day. That is, the position in time of the OTC FX forwardsmaturity date compared with the positions in time of the near and fartenors changes, so the weighting defined by Equations (1) and (2)changes.

For the FX forwards trade discussed above, which has a maturity date ofT+135 days, where T is now yesterday, from Equation (1):

${FuturesContract}_{NearTenor} = {{1 - \frac{134 - 90}{180 - 90}} = {0.511 = {51.1\%}}}$

and from Equation (2):

${FuturesContract}_{FarTenor} = {{1 - \frac{180 - 134}{180 - 90}} = {0.489 = {48.9\%}}}$

That is, the outstanding OTC position is now more heavily weightedtowards the near tenor. This is expected, as the maturity date of OTCposition is now closer in time to the near tenor than to the far tenor.

Mapping mechanism 111 performs this re-map by generating new positionsto the clearing house 103. Firstly, the mapper generates one or morepositions to offset each outstanding position. For each outstandingposition, two positions may be generated: a position equal to thereverse position of the futures contract corresponding to the near tenoris generated, and a position equal to the reverse position of thefutures contract corresponding to the far tenor is generated. Clearly,if the maturity date of the outstanding OTC position falls exactly oneither of the near and far tenors, only one reverse position will needto be generated, as the other will be equal to zero.

The reverse positions are exactly the same as the original mappedpositions (except for the direction), so that the outstanding positionis completely neutralized. Secondly, the mapping mechanism generates newpositions corresponding to the original outstanding positions, butweighted for the next business day. This maintains the net position.

Once the FX forward's value date converges to spot, it can beincorporated into the FX spot positions. That is, once the FX forwardsvalue date becomes equal to T+2 business days, it becomes an FX spotposition.

As already discussed, for FX forwards (and other future dated activity),the number of contracts defined depends on the number and spread ofvalue dates of the original OTC positions. Clearly, if more contractsare defined, the weighting and mapping will be more straightforward andthe number of positions to be mapped will be reduced. On the other hand,if fewer contracts are defined, this may be more straightforward interms of number of contracts, but the number of positions created willbe greater. Thus, there is a trade off between the number of futurescontracts and the volume of positions the mapping will generate. Thedeciding factor will be the reconciliation requirements between thecomputer systems at the clearing house and the computer systems managingthe perpetual futures.

Example 1

In the following example, the OTC product is FX spot, and the clearinghouse is a futures clearing house.

Day 1—Oct. 20, 2008:

The opening position on 20 Oct. 2008 is zero, so:

On 20 Oct. 2008, a trader buys FX spot 1,000,000 EUR-USD at a rate of1.365. That is:

At the end of the business day on 20 Oct. 2008, the closing EUR-USD rateis 1.385 which gives an OTC mark-to-market surplus equity of (i.e.credit) of USD 20,000, in order to leave the trader's notional positionunaffected. This is the margin requirement at the clearing house inorder to account for the value of the position if it were liquidatednow. Thus, the closing position at the end of the business day, is:

At the change of the business day, the following positions are generatedby the mapping mechanism:

The first generated position in Table 1d offsets the +Dec099 closingposition in Table 1c, and the second generated position re-maps theoriginal position into a +Sep099 position, since the date has movedforward one calendar day from spot (S=T+2) to tomorrow (T+1).

Thus, combining the closing positions in Table 1c with the generatedpositions in Table 1d, gives:

TABLE 1e End of Day view on 20 Oct. 2008 OTC Maturity date Futures 22OCT. 08: Sep099 EUR +1 million    +1 million USD −1.365 million −1.365million 23 OCT. 08: Dec099 EUR 0 0 USD 0 0 OTC Mark-to-market: +USD20,000

The only Sep099 position in Table 1e is the second generated position inTable 1d. The Dec099 position has been netted off to zero.

Day 2—Oct. 21, 2008:

The trader's opening position on 21 Oct. 2008 is shown.

This is the closing position on 20 October (Table 1c) combined with thegenerated positions (Table 1d), that is, the position shown in Table 1e.As already mentioned, the trader has a futures margin requirement, whichwill be reflected as surplus equity in the OTC market, of USD 20,000, toensure no mark-to-market change. Unlike futures variation marginsettlements daily, OTC markets will reflect increase or decrease inequity with actual cash flows resulting from mark-to-market taking placeon the delivery date of the OTC contract. Minimum equity requirementswill dictate potential risk management processes.

On 21 Oct. 2008, the trader rolls his currency position in the FX OTCmarket forward to spot, less interest (cost-of-carry) charges forcarrying a position overnight. This is effectively selling FXnext-day-delivery 1,000,000 EUR-USD at a rate of 1.3975 and buying FXspot 1,000,000 EUR-USD at a rate of 1.398. That is:

At the end of the business day on 21 Oct. 2008, the closing EUR-USD rateis 1.4, which gives the OTC mark-to-market surpluses shown in Table 2c.Thus, the closing position at the end of the business day, is:

This is the opening position on 21 Oct. 2008 (Table 2a) combined withthe day's activity (Table 2b). At the end of the business day on 21 Oct.2008, the following positions are generated by the mapping mechanism:

The first generated position in Table 2d offsets the +Sep099 closingposition in Table 2c, and the second generated position re-maps thatposition into a +Jun099 position, since we have moved forward onecalendar day. Similarly, the third generated position offsets the−Sep099 closing position, and the fourth generated position re-maps thatposition into a −Jun099 position. Finally, the fifth generated positionoffsets the +Dec099 closing position, and the sixth generated positionre-maps that position into a +Sep099 position.

Thus, combining the closing positions in Table 2c with the generatedpositions in Table 2d, gives:

TABLE 2e End of Day view on 21 Oct. 2008 OTC Maturity date Futures 22OCT. 08: Jun099 EUR 0 0 USD +32,500 +32,500 23 OCT. 08: Sep099 EUR +1million    +1 million USD −1.398 million −1.398 million 24 OCT. 08:Dec099 EUR 0 0 USD 0 0 OTC Mark-to-market: +USD 34,500

The resulting Jun099 position in Table 2e is the net of the Jun099positions in Table 2d i.e. the second and fourth generated positions.There is no Jun099 position in Table 2c. The resulting Sep099 positionin Table 2e is the net of the Sep099 position in Table 2c and the Sep099positions in Table 2d i.e. the first, third and sixth generatedpositions. The resulting Dec099 position in Table 2e is the net of theDec099 position in Table 2c and the Dec099 position and Dec099 positionin Table 2d i.e. the fifth generated position.

Day 3—Oct. 22, 2008:

The trader's opening position on 22 Oct. 2008 is shown.

This is the closing position on 21 Oct. 2008 (Table 2c) combined withthe generated positions (Table 2d), that is, the position shown in Table2e. As already mentioned, the trader has a futures margin requirement,which will be reflected as surplus equity in the OTC market, of USD34,500.

On 22 Oct. 2008, the trader rolls his currency position in the FX OTCmarket forward to spot, less interest (cost-of-carry) for carrying aposition overnight. This is effectively selling FX next-day-delivery1,000,000 EUR-USD at a rate of 1.385 and buying FX spot 1,000,000 EUR-USD at a rate of 1.3855. That is:

At the opening of the day, the Jun099 position must be closed out tozero, since this corresponds to settlement today, so cannot beoutstanding at the end of the day, when new trades are generated toaccount for the calendar date change. From Table 2e, the outstandingJun099 position has a money only balance of USD 32,500. The clearinghouse will pay and receive all appropriate money only balances, in thiscase physically transferring USD 32,500. Thus, there is a creation ofmoney movement on the original OTC value date.

At the end of the business day on 22 Oct. 2008, the closing EUR-USD rateis 1.39, which gives the OTC mark-to-market surpluses shown in Table 3c.Thus, the closing position at the end of the business day, is:

This is the opening position on 22 Oct. 2008 (Table 3a) combined withthe day's activity (Table 3b), less the Jun099 settled position. At theend of the business day on 22 Oct. 2008, the following positions aregenerated by the mapping mechanism:

The first generated position in Table 3d offsets the +Sep099 closingposition in Table 3c, and the second generated position re-maps thatposition into a +Jun099 position, since we have moved forward onecalendar day. Similarly, the third generated position offsets the−Sep099 closing position, and the fourth generated position re-maps thatposition into a −Jun099 position. Finally, the fifth generated positionoffsets the +Dec099 closing position, and the sixth generated positionre-maps that position into a +Sep099 position.

Thus, combining the closing positions in Table 3c with the generatedpositions in Table 3d, gives:

TABLE 3e End of Day view on 22 Oct. 2008 OTC Maturity date Futures 23OCT. 08: Jun099 EUR 0 0 USD −13,000 −13,000 24 OCT. 08: Sep099 EUR +1million    +1 million USD −1.385 million −1.385 million 25 OCT. 08:Dec099 EUR 0 0 USD 0 0 OTC Mark-to-market: −USD 8,500

The resulting Jun099 position in Table 3e is the net of the Jun099positions in Table 3d i.e. the second and fourth generated positions.There is no Jun099 position in Table 3c. The resulting Sep099 positionin Table 3e is the net of the two Sep099 positions in Table 3c and thethree Sep099 positions in Table 3d i.e. the first, third and sixthgenerated positions. The resulting Dec099 position in Table 3e is thenet of the Dec099 position in Table 3c and the Dec099 position in Table3d i.e. the fifth generated position

Example 2

In the following example, the OTC product is FX forwards, and theclearing house is a futures clearing house.

Day 1—Oct. 27, 2008:

The opening position on 27 Oct. 2008 is zero, so:

On 27 Oct. 2008, a trader buys FX forwards having a value date of 2 Mar.2009 (126 days away) 1,000,000 EUR-USD at a rate of 1.378.

In this example, the two closest defined tenors are the 90 day tenorwhich maps to +Jun098 and the 180 day tenor which maps to +Sep098. UsingEquation (1), gives a FuturesContract_(90dayTenor) weighting of 60% andusing Equation (2), gives FuturesContract_(180dayTenor) weighting of40%. That is:

Thus, the closing position at the end of the business day, is:

At the end of the business day on 27 Oct. 2008, the mapping mechanismre-weights the trades to account for the move forward one calendar day.Using Equation (1), gives a FuturesContract_(90dayTenor) weighting of61.1% and using Equation (2), gives FuturesContract_(180dayTenor)weighting of 38.9%. Thus, the following positions are generated by themapping mechanism:

The first generated position in Table 4e offsets the +Jun098 closingposition in Table 4d, and the second generated position re-maps thatposition into a new +Jun098 position. Similarly, the third generatedposition in Table 4e offsets the +Sep098 closing position in Table 4d,and the fourth generated position re-maps that position into a new+Sep098 position.

Thus, it can be seen that there is no position having a tenor of 2March, only tenors of 90 days and 180 days. This removes the need tomanage a contract on the 126th day value date of 2 Mar. 2009.

Once the FX forward's value date converges to spot, it will be managedusing the process outlined above in mapping for FX spot.

Many modifications to the embodiments are possible and will occur tothose skilled in the art without departing from the invention which isdefined by the following claims.

1. A method in a computerized clearing system for conversion of OTC FXforwards positions from one or more OTC platforms, into standard futurescontracts clearable at a computerized futures clearing house, each OTCFX forwards position having a future value date, the method comprisingthe steps of: a) defining, in a computer processor, x tenors and xcorresponding standard futures contracts clearable at the clearinghouse, wherein x is a predefined number determined from the number andspread of value dates of the OTC FX forwards positions; b) weightingeach OTC FX forwards position between first and second of the x standardfutures contracts, based on the point in time of the OTC FX forwardsposition's future value date relative to the point in time, with respectto the current business day, of the tenor corresponding to the first ofthe two of the x standard futures contracts and the point in time, withrespect to the current business day, of the tenor corresponding to thesecond of the two of the x standard futures contracts; c) mapping afirst portion of the OTC FX forwards position into the first standardfutures contract, based on the weighting of the first standard futurescontract; d) mapping a second portion of the OTC FX forwards positioninto the second standard futures contract, based on the weighting of thesecond standard futures contract, wherein the sum of the first andsecond portions equals the whole OTC FX forwards position; and e) at theend of the current business day, before a new business day, repeatingsteps b), c) and d) for the new business day.
 2. The method of claim 1,wherein step e) comprises, when an FX forwards position's future valuedate has become equal to two days after the new business day, treatingthe FX forwards position as an FX spot position having a value date oftwo days after the current business day.
 3. The method of claim 2,wherein the FX spot position takes into account mark-to-marketsurpluses.